© Brian Davis
|
The Federal Reserve is planning to continue its bond-buying stimulus for the foreseeable future despite hints of strength in the economy and rising concern about the policy's risks. Allan Metzer, a fellow at Stanford University's Hoover Institution and Fed historian, said that the Fed officials usually focus too little on the long-run consequences of their policies. Do you also think that the Fed's plan may have positive short-term effects, but unexpected drastic consequences in the future?
That is very possible and that seems to be where probably the majority of the finance community comes down on it. I would say that my stance on this is a little bit different than where the majority is. In general, I am a supporter of what the Fed has done. I believe that in times of deep recession as much liquidity as possible should be provided until there are signs of inflation or improvement in GDP and unemployment.
As far as where we are right now, part of the problem what the Fed is trying to solve is to counterbalance the ineptitude of the American government on fiscal policy. Until businesses in the U.S. start to take on more risk and cut expenses so much that they have to hire again, when they start to see a productivity slowdown, I think the Fed is doing the best that they can. In the short run we are not seeing negative effects other then, perhaps, more speculation in some asset groups. However, I still believe the benefits outweigh the costs.
In terms of the long run consequences, the question is to what extent the Fed can wind down all of the liquidity it has injected without throwing the economy back into recession?
I think just recently we have seen a discussion between the Fed's hawks and doves, which has given indications to the market that the central bankers stand ready to mop that up.
To sum up, I am in favour of what the Fed is doing and I am confident that the central bank will be able to pull this back, when it is necessary.
Some experts argue that the Fed should stop intervening and let the free markets work allowing the nation's economy to restructure itself into something healthier. In your opinion, should the recession that the Fed is trying so desperately to prevent be allowed to run its own course?
For the most part, I am completely in favour of laissez-faire economics as much as possible, except in times of a depression. Historically, it takes from seven to ten years to come out of a financial collapse. I think what the Fed has done it has provided something of a floor to the negative consequences. Obviously, the big problem here is just the ineptitude of the economy from the fiscal side. If the battle between the Republicans and Democrats was over, then the agreement on budget and tax reform would be achieved, providing some confidence in the U.S. government and the economy, and enabling the Fed to start to back off.
Another view suggests that any job created as a result of cheap monetary stimulus will not be able to survive without the support of the stimulus. To your mind, will the Fed be able to maintain its 6.5% unemployment rate target once it is reached if the monetary incentives are withdrawn?
In general, I think the Fed will be able to maintain a sustainable unemployment rate, but I do not think that the central bankers are targeting a 6.5% unemployment rate. I assume they are trying to kind of talk the economy into believing that the Fed will be providing so much liquidity. In the wake of the recent discussions, the policymakers start to believe that the economy is strongly moving in the direction of 7% unemployment. This would also be my target. I think they really start to attempt to mop this up in a strategic fashion.
When, do you think, the Fed will start to wind down its asset purchase programme?
Probability of greater problems in Europe and worsening fiscal situation in the U.S., those are the two things that I worried about. As recently some data coming from France was negative, this raised concerns about Europe's economic situation. However, if we do not have another crisis in Europe, and the fiscal crisis in the U.S., I think the Fed will start considering winding down the monetary stimulus by the end of the year.